September Market Update

In what has been a year dominated by large tech stocks – Apple, Google, Amazon, etc. – September was a good month for Size and Style underdogs as Small-cap stocks outperformed Large-caps and Value stocks held the edge over Growth stocks. Earlier we noted how stocks were not participating in this year’s stock rally evenly and, while this is still true to some extent – even after this month, Value stocks have only returned half of what Growth returned – the gap between smaller and larger companies shrunk significantly.

In Size and Style Responsive portfolios, we have been tilting towards Growth while maintaining a neutral Size tilt as the longer-term trends favor Growth and shows no clear momentum in Size. September validated our views with regards to Size and did nothing to change the trend in Style. Counter-trend months are common and ultimately do little to affect the direction of any established long-term trend.

From a Sector standpoint, Energy stocks rebounded strongly, highlighting the importance of maintaining allocations to sectors that are out of favor. It is impossible to know ahead of time how sectors will perform so the best investment strategy is to maintain exposure to all sectors. Typically, some sectors will go up while others will go down – this is why diversification is important.

Volatility was muted, spawning headlines like The Best Reason to be Bearish is There is No Reason to be Bearish, as the S&P 500 set record highs. The consistent lack of volatility is bordering on historic as the maximum drawdown – the largest movement from peak to trough for stocks during a given year – of the S&P 500 this year is only 3%. Should this hold, it would be the lowest max drawdown in a calendar year for the S&P 500 ever.

This smooth ride has been enjoyable for stock investors and while volatility will return at some point in the future, the low volatility is justifiable. The World Economic Forum found that the United States is the second-most competitive economy in the world, rising to an eight-year high, as the United States scored well in efficiency and innovation.  This is consistent with the prolonged recovery and expansion since the Financial Crisis and related bull market. There are no obvious economic warning signs flashing right now as companies are generating strong earnings, valuations are fair, unemployment is low and inflation remains tame.